Unemployment develops, that is to say, because people want the moon;--men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.Well, perhaps Keynes should have been a tad more explicit... Unemployment is a consequence of a system of exchange based on money. But why money? Because money is created by banks through issuing loans that bear interest. People want the moon -- they want money -- because unlike most other objects of desire, it (seemingly) gets bigger all by itself. Just buy a bond and watch it grow.
For Keynes, what differentiates a monetary economy from a real wage (barter) economy is the lack of "a mechanism of some kind to ensure that the exchange value of the money incomes of the factors is always equal in the aggregate to the proportion of current output which would have been the factor's share". Neil Niman, Keynes and the Invisible Hand TheoremSo why then would highly intelligent and disinterested economists revert to a barter model of economy to try to explain something -- unemployment -- that is a distinctive feature of a monetary economy?
The characteristics of a monetary economy: a Keynes–Schumpeter approach
Giancarlo Bertocco, Camb. J. Econ. (2007) 31 (1): 101-122. doi: 10.1093/cje/be
Abstract
Mainstream monetary theory considers money only as an instrument meant to facilitate trading without having any effect on income or on the evolution of the economic system. The aim of this paper is to elaborate a monetary theory capable of supporting the thesis of money non-neutrality based on the arguments developed by Keynes and Schumpeter. The synthesis of the theories of these two great economists will be formulated starting from the two points which are common in the views of Keynes and Schumpeter. First, in contrast with mainstream theory, Keynes and Schumpeter state that the diffusion of a fiat money induces a radical modification into the way in which the economic system works. Second, when Keynes and Schumpeter describe the reasons why money and financial aggregates are not neutral, they highlight the fundamental role of the credit market and of banks; in contrast with the mainstream theory, they do not consider the credit market as the mirror image of the goods market.
Hi, I'm back. Since you brought back Keynes, I couldn't resist.
ReplyDeleteI disagree with Rowe, and it seems you and Keynes as well, that a money economy is necessary to explain a recession.
1) The way money is described in New Keynesian Models is disappointing. There is no fundamental value of money, it's just suck in the utility function. Why do people use money? Because they like it. QED.
2) The way money is created by modern central banks largely involves open-market operations working through the banking system, which means it is fundamentally about credit. Yet the models always assume a Friedman style helicopter drop, where money is directly given by the central bank to households. In reality, this would look a lot more like a tax cut, and has essentially nothing to do with actually existing monetary policy.
Now why do I think that money is not actually necessary to model recessions-
All you need is a real demand shock in a barter economy. If Keynes' animal spirits start acting up (or a massive US housing bubble pops), investors will get scared and invest less. This causes unemployment in capital goods industries (machinery, construction, etc.), as employers see inventories bile up and free hiring/layoff workers. These workers cut back their consumption and this causes unemployment in the other sectors. Given that demand is much lower, profits are low for investors, such their fears are realized (self fulfilling prophecy). This means that demand is stuck at an underemployment equilibrium, where aggregate demand is low, profit margin are back to normal, investment and consumption are low, etc. This can result even when there is no money, even if workers are paid in apples, investors are paid in apples, etc.
So I don't think that using money is fundamental, but economics still needs to figure out a better way of looking at monetary policy, using a credit approach instead of helicopter-drop money approach.